The market regulator has reportedly proposed removing the 12.5% long-term capital gains tax on foreign investors, a move that could make Indian equities more attractive to overseas funds.
Highlights
- SEBI reportedly recommends removing the 12.5% LTCG tax on foreign investors.
- Proposal comes ahead of Union Budget 2027.
- The recommendation aims to improve India’s attractiveness to overseas investors.
- Lower taxation could encourage foreign portfolio investment in Indian equities.
- Any change would require government approval and amendments to tax provisions.
- The existing tax structure remains applicable unless officially revised.
SEBI Proposes Scrapping 12.5% LTCG Tax for Foreign Investors Ahead of Budget 2027
Mumbai, November 3: The Securities and Exchange Board of India (SEBI) has reportedly recommended removing the 12.5% long-term capital gains (LTCG) tax on foreign equity investors as part of its pre-Budget proposals for 2027-28. The move aims to attract overseas investment and improve the competitiveness of Indian equity markets.
According to Reuters, citing two people familiar with the matter, the regulator has submitted its recommendations to the government. However, the proposals are non-binding, and the final decision rests with the Finance Ministry. Reuters +1
Why SEBI Wants LTCG Tax Removed
Foreign investors currently pay a 12.5% LTCG tax on eligible equity investments held for more than one year. Short-term capital gains are taxed at 20%, while securities transaction tax and dividend-related taxes add to overall investment costs.
SEBI has reportedly highlighted India’s relatively high equity transaction costs, which have become a concern for foreign portfolio investors.
The recommendation follows sustained foreign investor selling in Indian markets. Overseas investors have sold approximately $31 billion worth of Indian equities in 2026, according to Reuters.
Mutual Fund Investors May Also Get Relief
Apart from foreign investors, SEBI has proposed tax relief for domestic mutual fund investors.
Under the recommendation, switching between eligible mutual fund schemes would not trigger LTCG tax if the existing investment has been held for more than one year.
Currently, switching schemes is generally treated as redemption followed by a fresh investment, potentially resulting in capital gains tax liability.
The proposed change could provide greater flexibility to investors seeking to rebalance their portfolios without immediately paying LTCG tax. Mint +1
Could the Proposal Boost Foreign Investment?
Market participants believe lower capital gains taxation could improve post-tax returns and encourage foreign portfolio inflows.
Brokerage firm IIFL estimates that eliminating capital gains tax could improve foreign investors’ returns by approximately 2.3 percentage points.
However, taxation is only one factor influencing investment decisions. Currency movements, corporate earnings and global market conditions also affect foreign capital flows. The Economic Times +1
What Happens Next?
The government will examine SEBI’s recommendations ahead of the Union Budget scheduled for February 2027.
Any decision to remove or reduce LTCG tax would require changes to the applicable tax framework.
Until the government announces and implements changes, the existing capital gains tax rules will remain in force.
